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The German Federal Constitutional Court Ruling and the European Central Bank’s Strategy

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  • Lars P Feld
  • Volker Wieland

Abstract

The ruling of the German Federal Constitutional Court and its call for conducting and communicating proportionality assessments regarding monetary policy have been the subject of some controversy. However, it can also be understood as a way to strengthen the de facto independence of the European Central Bank (ECB). This article shows how a regular proportionality check could be integrated in the ECB’s strategy, which is currently undergoing a systematic review. In particular, it proposes that quantitative benchmarks for policy rates and the central bank balance sheet should be included. Deviations from such benchmarks can have benefits in terms of the intended path for inflation while involving costs in terms of risks and side effects that need to be balanced. Practical applications to the euro area are provided.

Suggested Citation

  • Lars P Feld & Volker Wieland, 2021. "The German Federal Constitutional Court Ruling and the European Central Bank’s Strategy," Journal of Financial Regulation, Oxford University Press, vol. 7(2), pages 217-253.
    • Handle: RePEc:oup:refreg:v:7:y:2021:i:2:p:217-253.
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    Cited by:

    1. Feld, Lars P. & Fuest, Clemens & Haucap, Justus & Schweitzer, Heike & Wieland, Volker & Wigger, Berthold U., 2021. "The monetary policy strategy of the European Central Bank: Review and recommendations," Kronberger Kreis-Studien 67e, Stiftung Marktwirtschaft / The Market Economy Foundation, Berlin.
    2. Wieland, Volker, 2021. "The decline in euro area inflation and the choice of policy strategy," IMFS Working Paper Series 159, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    3. Böhl, Gregor, 2021. "Efficient solution and computation of models with occasionally binding constraints," IMFS Working Paper Series 148, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).

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    More about this item

    Keywords

    central bank independence; monetary institutions; monetary policy strategy; proportionality; policy rules; quantitative easing;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)

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